Say Bye-Bye to the Free Market
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U.S. Weighs Takeover of Two Mortgage Giants
Friday July 11, 12:35 pm ET
By STEPHEN LABATON and STEVEN R. WEISMAN
WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.
The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.
Government bailouts are one thing, but this is essentially nationalizing the companies. The enormous side effects of artificially easy money and easy credit are beginning to show. A correction has been long overdue and consistently delayed by the Federal Reserve. Printing money out of thin air at any time is not going to come without consequences. Both physically and psychologically it is extremely damaging long-term. History proves that. Never throughout history has any country gone down the path of fiat money and come out better for it. Currency debasement has been tried since the beginning of government as means of stimulating the economy, and it has always failed. Unfortunately, the U.S. is in a stickier situation given that the dollar is the reserve currency of the world (thanks to the time when the dollar was seen as good as gold). As much as people like to argue that these times are different and a fiat monetary system fits in modern times, it simply isn't true. In the long run, government bailouts and nationalizing companies cannot and will not solve the problem. The only way to solve the problem in a way that will promote long-term stability and security is to let the market forces work. The easy, simple short-term solutions always look like the way to go, but the problem will not go away. So as bad as this situation may or potentially may be, ignoring the signs the market is sending is far more deadly in the long run. Clearly Fannie May and Freddie Mac screwed up and are paying the consequences of easy credit and money. Subprime mortgages are an extremely risky business and the government and the Federal Reserve are telling these businesses that the government will be behind them pretty much no matter what happens.
Politics and economics are more involved than ever today. Over these past few years I believe we have moved in a potentially fatal direction away from a free market and a free society. Government bailouts and takeovers send the absolute wrong message and will probably increase speculation in the markets as well. Bailouts are nothing new, but the rate at which they are increasing and expanding both in amount and size is very alarming. People need to accept that businesses fail. Taking risks without acknowledging the possible outcomes is foolhardy and is not something a government bailout will teach. Of course, a lot of this comes back to the policies from the Federal Reserve. It's frustrating, although not surprising, that increased regulation and increased power to the government and the Federal Reserve are seen as the answers to the problems. All in all, don't expect to see a shortage of money being printed and debt being created in the years ahead.
"A disordered currency is one of the greatest political evils." -- Daniel Webster
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs." -- Thomas Jefferson
"Inflation is the one form of taxation that can be imposed without legislation." -- Milton Friedman
"The Federal Reserve banks are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this nation is run by the International bankers." -- Congressman Louis T. McFadden (speaking in the Senate)
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." -- John Kenneth Galbraith